Our Stanford and Berkeley Lean LaunchPad classes are over for this year, and as usual we learned as much from teaching the teams as the teams did from us.
Here are a few of the Lessons Learned from these two classes.
Have each team talk to 10 customers before the class starts Each year we learn how to move more of the Lean LaunchPad class logistics outside our classroom so teams have more time for in-class learning.
A few years ago, we moved the formation of teams’ to before the class started and in doing so, saved a week of what normally be an in-class time activity. To make this happen, we hold three “information sessions” two weeks apart before the class starts. In these “info sessions” we describe the purpose of the class, and then let students mix, meet and form teams. During this pre-class time we share a Google doc where students who have ideas can find other team members, and students without an idea can find a team that matches their skills and interests. Application and admission to the class is by interview with a fully formed team.
Second, the competitive slide enforces a modicum of due diligence on the product and market. (We got tired of knowing more about each team’s market by doing a Google search as they presented. Now it’s their job.)
Team Application: Competitive “Petal” Slide
Finally, having teams spend time on the canvas and competition as part of the application process saves weeks of what would normally be an in-class activity (and as a bonus gives the team a heads-up about the difficulty of the class and shows whether they’re serious about the class or just shopping.)
This year we learned to raise the bar once again. Could we get the teams to come into class having already talked to 10 customers? Instead of using the first class to have teams just present their business model canvas, this time the team’s first presentation would be about what they learned outside the building about their value proposition. (We pointed them to our tutorials on customer discovery and how to conduct customer interviews but didn’t expect them to be experts on week 1.)
1st week team title slide – 11 interviews before class started
We did an A/B test by requiring our teams in one school do this while not requiring it for the teams in the other school. The result? Teams that had to talk to customers before the class hit the ground running. There was a substantive difference in team trajectory and velocitythat continued throughout the quarter. The amount of learning between the two felt quite different. While there may have been other factors (team selection bias, team make up, etc.), we’ll now make this an integral part of all the classes.
Have each team put the number of Mentor interactions on their weekly title slide The second innovation this year involved mentors. Each team is assigned a mentor as a coach. We’ve been trying to figure out how to make mentor engagements with their teams a regular rather an adhoc activity. While we have required the teams to add a summary of any mentor interaction to their LaunchPad Central narrative, we felt we didn’t have sufficient high-level visibility for these essential interactions.
But this year, a seemingly minor change to the teams’ weekly cover slide had an important impact. As teams present each week, their cover slides show the number of customers interviewed for that week (>10) along with the cumulative customers interviewed. This year we added one more metric for their cover slides– the number of mentor interactions for that week (>1) along with the cumulative number of mentor interactions.
This enhanced the visibility of the teams interaction (or lack of) with their mentors and allowed us to proactively intervene early if there wasn’t sufficient interaction.
Here are a few of the Final Presentations (see here for all of them)
If you can’t see the presentation above, click here
President Bieto, Dean Sauquet, members of the faculty, distinguished guests, and ladies and gentlemen….Thank you for the kind introduction. I’m honored to be at a university noted for knowledge, and in a city with 2000 years of history – home of Gaudí one of the 20th century’s greatest innovators.
I’d like to start with a request.
Everyone, hold your phone up in the air like this.
Now look around. In this sea of phones do you see any Blackberries? How about any Nokia phones?
Ok you can put your phones down now but let’s keep exploring this a bit. Raise your hand if you rented a VHS tape last night? Or if you used a paper map to find your way here?
These questions and your answers lie at the heart of what I’d like to talk about with you today: the changing face of innovation and your role in it.
Let’s start with Joseph Schumpeter. I’m sure many of you have heard his name. Schumpeter was an economist who taught at Harvard in the 1930’s and 40’s. I like the guy because he’s credited with coining the word entrepreneur. But you probably remember him as the one who proposed the theory of creative destruction. According to Schumpeter, capitalism is an evolutionary process where new industries and new companies continually emerge to knock out the old.
Fifty years later another Harvard professor, Clayton Christensen, developed his theory of disruptive innovation, which actually described how creative destruction worked.
Disruptive innovation leads to the creative destruction of businesses that once seemed pre-eminent and secure.
Which brings me back to your mobile phones.
Think about this; 7 years ago Nokia owned 50% of the handset market. Apple owned 0%. In fact, it was only 7 years ago that Apple shipped its first iPhone and Google introduced its Android operating system.
Fast-forward to today—Apple is the most profitable Smartphone company in the world and in Spain Android commands a market share of more than 90%. And Nokia? Its worldwide market share of Smartphones has dwindled to 5%.
You’re witnessing creative destruction and disruptive innovation at work. It’s the paradox of progress in a capitalist economy.
So congratulations graduates – as you move forward in your careers, you’ll be face to face with innovation that’s relentless.
And that’s what I’d like to talk about today—how innovation will shape the business world of the next 50 years—and what it means for you.
The Perfect Storm Your time at ESADE has trained you to become a global business leader.
But the world you lead will be much different from the one your professors knew or your predecessors managed.
Just look at the disruptive challenges that businesses face today– globalization, China as a manufacturer, China as a consumer, the Internet, and a steady stream of new startups. Today’s workforce has radically different expectations, brands are losing their power, physical channels are being destroyed by virtual ones, market share is less important than market creation, and software is eating world.
Industries that we all grew up with, industries that enjoyed decades of market dominance – like newspapers, bookstores, video rentals, personal computers — are being swept away.
The convergence of digital trends along with the rise of China and globalization has upended the rules for almost every business in every corner of the globe. It’s worth noting that everything from the Internet, to electric cars, genomic sequencing, mobile apps, and social media — were pioneered by startups, not existing companies.
Perhaps that’s because where established companies might see risks or threats, startups see opportunity. As the venture capital business has come roaring back in the last 5 years, startups are awash in available capital. As a consequence, existing companies confront a tidal wave of competitors 100 times what they saw 25 years ago.
Efficiency over innovation Yet in the face of all this change, traditional firms continue to embrace a management ethos that values efficiency over innovation. Companies horde cash and squeeze the most revenue and margin from the money they use. Instead of measuring success in dollars of profit, …firms focus on measuring capital efficiency. Metrics like Return on Net Assets, Return on Capital and Internal Rate of Return are the guiding stars of the board and CEO.
Cheered on by finance professors, Wall Street analysts, investors and hedge funds, companies have learned how to make metrics like Internal Rate of Return look great by one; outsourcing everything, two, getting assets off their balance sheet, and three only investing in things that pay off fast.
As Harvard professor Clayton Christensen noted, these efficiency metrics provided wise guidance for times when capital was scarce and raising money was hard. But they have also stacked the deck against investment in long-term innovation.
Since the financial crisis of 2008, policy makers have kept interest rates at near zero, flooding the market with cheap money in an attempt to restart growth. In spite of this, private equity funds have used the rallying cry of efficiency to hijack corporate strategy and loot the profits that historically would have been reinvested into research and development and new products. We legalized robbing the corporate treasury. Today billions of dollars that companies could have invested in innovation are sitting in the hands of private equity funds.
Unfortunately as we’ve learned from recent experience, using Return on Net Assets and IRR as proxies for efficiency and execution won’t save a company when their industry encounters creative disruption. Ask Sony about Samsung, ask any retailer about Amazon, any car company about Tesla, and any newspaper company about the web.
The stock market clearly values companies that can deliver disruptive innovation. Look at the valuations of companies like Tesla, Illumina, and Twitter.
In fact, I predict that over the next few decades, we will see two classes of public companies. The first will be commodity businesses that are valued for their ability to execute their current business model. Their lifetime as a market leader will be measured in years. The second class will be firms with a demonstrated ability to continually innovate and reinvent their business models. The companies that can show “startup-like” growth rates of 50% plus per year will get stratospheric market valuations.
So I hope you are thinking—“hey how can I lead a business with startup growth?” At least I hope you’re thinking that, rather than “oops I joined the wrong company.”The question for all of you is … “What will it take to inspire and manage this kind of innovation?”
Innovation Before I answer that question, let’s take a minute to establish a common definition of innovation. At its most basic, innovation means to introduce something new. But in a business context, the meaning gets more nuanced. I’d like to describe the four types of innovation you can build inside a corporation:
The first type of corporate innovation is individual initiative. It’s exactly as it sounds – you build a corporate culture where anyone can suggest an idea and start a project. Some companies use a suggestion box, others like Google give employees 20% of their time to work on their own projects.
The second type of business innovation is called process improvement. This is the kind most of us are familiar with. Car companies introduce new models each year, running shoes grow ever lighter and more flexible, Coca-Cola offers a new version of Coke. Smart companies are always looking to make their current products better – and there are many ways to do this. For example they can reduce component cost, introduce a line extension or create new versions of the existing product. These innovations do not require change in a company’s existing business model.
This is what companies typically do to secure and defend their core business.
The third type of business innovation – continuous innovation – is much harder. Continuous innovation builds on a strength of the company’s current business model but requires that new elements be created. For example, Coke added snack foods, which could be distributed through its existing distribution channels. The Amazon Kindle played on Amazon’s strengths as a distributor of content but required developing expertise in electronics and manufacturing.
Fourth and finally is disruptive innovation – this is the innovation we associate with startups. This type of innovation creates new products or new services that did not exist before. It’s the automobile in the 1910’s, radio in the 1920’s, television in the 1950’s, the integrated circuit in the 1960’s, the fax machine in the 1970’s, personal computers in the 1980’s, the Internet in the 1990’s, and the Smartphone, human genome sequencing, and even fracking in this decade. These innovations are exactly what Schumpeter and Christensen were talking about. They create new industries and destroy existing ones. And interestingly, in spite of all their resources, large companies are responsible for very, very few disruptive innovations.
The first two types of innovation—individual and process innovation– are what good companies do well. The third type—continuous innovation—is a hallmark of great companies like GE and Procter and Gamble. But the fourth type of innovation – creating disruptive innovation– and doing it on a repeatable basis– is what extraordinary companies do. Apple with the iPod, iPhone and iPad; Amazon with Amazon Web Services and Kindle; Toyota with the Prius… these companies are extraordinary because, like startups, they create entirely new products and services.
ESADE and other great business schools have provided decades of advice and strategy for the first three types of innovation. But leading an existing firm to innovate like a startup is not business as usual.
Building Innovation Internally is Hard Paradoxically, in spite of the seemingly endless resources, innovation inside of an existing company is much harder than inside a startup. That’s because existing companies face a conundrum: Every policy and procedure that makes them efficient execution machines stifles innovation.
Think about this. When it comes to innovation, public companies have two strikes against them. First the markets favor capital efficiency over R&D. And secondly, their sole purpose is to focus resources on the execution of their business model.
As a consequence, companies are optimized for execution over innovation. And to keep executing large organizations hire employees with a range of skills and competencies. To manage these employees companies create metrics to control, measure and reward execution. But remember—in public companies financial metrics take precedence. As a result, staff functions and business units develop their own performance indicators and processes to ensure that every part of the organization marches in lock step to the corporate numbers.
These Key Performance Indicators and processes are what make a company efficient —but they are also the root cause of its inability to be agile and innovative. Every time another execution process is added, corporate innovation dies a little more.
Act Like a Startup So how does a company act like a startup in search of new business models while still continuing to successfully execute?
First, management must understand that innovation happens not by exception but is integral to all parts of the firm. If they don’t, then the management team has simply become caretakers of the founders’ legacy. This never ends well.
Second and maybe the most difficult is the recognition that innovation is chaotic, messy and uncertain. Not everything will work out, but failure in innovation is not cause for firing but for learning. Managers need radically different tools to control and measure innovation. A company needs innovation policies, innovation processes and innovation incentives to match those it already has for execution. These will enable firms to embrace innovation by design not by exception.
Third, smart companies manage an innovation portfolio where they can pursue potential disruption in a variety of ways. To build innovation internally companies can adopt the practices of startups and accelerators. To buy innovation companies can buy intellectual property, acquire great teams, buy-out another company’s product line or even buy entire companies. And if they’re particularly challenged in a market they can acquire and integrate disruptive innovation. My favorite example is Exxon’s $35 billion purchase of XTO Energy in large part to get their fracking expertise.
Other smart companies are learning how to use Open Innovation pioneered by Henry Chesbrough who teaches here at ESADE. They can partner with suppliers, co-create with consumers, open-source key technologies, open their application programming interfaces, or run open incubators for customer ideas.
Everything I’ve been talking about smart companies have already figured out. Many firms are creating the new role of Chief Innovation Officer to lead and manage these innovation activities. Ultimately this is not just another staff function. The Chief Innovation Officer is a c-level executive who runs the company’s entire innovation portfolio and oversees the integration of innovation metrics and initiatives across the entire organization.
Looking forward, all of you will play a role in the future of business innovation, whether you help to accelerate it or discourage it. How can you kill innovation? Some companies have so lost the DNA for innovation they become “rent seekers”. Rent seekers fight to keep the status quo. Instead of offering better products or superior service, rent seekers hire lawyers and lobbyists to influence politicians to pass laws that block competition. The bad news here is that countries where bribes and corruption are the cost of doing business or that are dominated by organized interest groups, tend to be the economic losers. And as rent-seeking becomes more attractive than innovation, the economy falls into decline.
I know that’s not the path most of you want to take. Instead I think you want to be part of the innovation team. And if you do you are in luck. Companies need your help.
They need your help in creating new metrics to manage measure disruptive innovation. They need your help in creating new innovation incentive systems that reward creative innovation.
And they need your help as leaders who can run companies that can both execute and innovate.
Finally, remember Innovation won’t come from plans or people outside your company – it will be found in the people you already have inside who understand your company’s strengths and its vulnerabilities.
So in closing, let me leave you with this final thought:
A pessimist sees danger in every opportunity but an optimist.. an optimist sees opportunity in every danger.
In the last 150 years only a few generations have had the opportunity to reshape the nature of business.
Henry Chesbrough is known as the father of Open Innovation and wrote the book that defined the practice. Henry is the Faculty Director of the Garwood Center for Corporate Innovation, at U.C. Berkeley in the Haas Business School. Henry and I teach a corporate innovation class together.
Thanks to Steve for the opportunity to share my thoughts with you all. This post follows directly on Steve’s earlier excellent post, Why Companies are not Startups.
More recently, Steve, Alexander Osterwalder and I have started sharing notes, ideas and insights on this problem. We even ran an executive education course last fall at Berkeley on Corporate Business Model Innovation that helped each of us understand the others’ perspectives on this problem. In this post, I want to share some new thoughts that build on Steve’s post, and connect them to Lean Startup methods. However, I will then argue that while these methods are necessary to managing new ventures inside a company, they are insufficient.
First, let me recap a key insight for me from Steve’s post. A startup is a temporary organization in search of a repeatable, scalable business model. A corporation, by contrast, is a permanent organization designed to execute a repeatable, scalable business model. While a simple statement, this is a profound insight. When companies want to innovate a new business model (vs. innovating new products and services within an already scaled business model), the processes that companies have optimized for execution inevitably interfere with the search processes needed to discover a new business model.
This has serious implications for corporate venturing, for innovating new businesses – and new business models – inside an existing corporation. The context for an internal venture inside an existing company is dramatically different from the context confronting an external startup out in the wild. The good news is that corporations have access to resources and capabilities that most startups can only dream of, whether it is free cash flow, a strong brand, a vibrant supply chain, strong distribution, a skilled sales force, and so on. The bad news is that, as Steve reminded us above, each of these assets is tailored to execute the existing business model, not to help search for a new one. So what seem like unfair advantages for corporate ventures become inflexible liabilities that block the search process of the venture.
But the contextual differences go even beyond these substantial differences. A corporate venture, struggling to search for a new, repeatable and scalable business model, must wage that struggle on two fronts, not just one. The external startup has to work long hours, and make many pivots, to identify the product-market fit, validate the MVP, and articulate a winning business model that can then be repeated and scaled. The internal venture must do all this, and more! The internal venture must fight on a second front at the same time within the corporation. That second fight must obtain the permissions, protection, resources, etc. needed to launch the venture initiative, and then must work to retain that support over time as conflicts arise (which they will).
Knowing Steve’s fondness for military metaphors, think of the corporate venture as fighting a war on two fronts at the same time. Just as Germany’s domination of Western Europe in World War II was eventually undone by its decision to launch a second front by invading Russia, so too unlike a start up, corporate ventures cannot focus solely on winning in the external marketplace. This leads to two key points:
Point 1: You have to fight – and win- on two fronts (both outside and inside), in order to succeed in corporate venturing. As Steve would say, this is a big idea.
One memorable example of this was Xerox’s internal venture capital fund, Xerox Technology Ventures (XTV). Launched by Robert Adams in 1989, this $30 million fund grew to over $200 million in the next 7 years, as it launched companies like Documentum and Document Sciences out of Xerox’s fabled Palo Alto Research Center. This financial performance was extraordinary, and put XTV in the top quartile of all VC funds launched in 1989. Ordinary VCs would use this success to raise an even larger fund, and try to create the magic once more.
But Xerox instead chose to shut XTV down in 1996, despite its external success. Why? XTV’s success created lots of internal dissatisfaction within Xerox. The success of Documentum and Document Sciences, they felt, came largely from Xerox technology and customers, yet the startup companies XTV funded got all the credit. Worse, Robert Adams and his two partners got 20% of the carried interest in the fund, resulting in payouts of $30 million to the partnership. This was more, far more, than the Xerox CEO was paid in those years. So XTV won in the market, but lost inside the corporation.
This leads us to:
Point two: Corporate ventures may need to pivot to obtain and retain internal corporate support for the venture. This is likely to be controversial for adherents to Lean Startup thinking because we traditionally think of pivoting to improve the product-market fit in the external marketplace. But astute corporate venture managers, realizing that they must fight the war on two fronts, will also be alert to the need to pivot if needed in order to keep the internal support they require in order to succeed. For example, the new venture might pivot away from current customers of the corporation in the early days of the venture, in order to reduce friction with the established sales force (who want to sell large quantities of the current product, not test minute quantities of some future product that may or may not ever be built in volume. Worse, the potential new product might give customers a reason to delay the purchase of today’s products).
This also suggests that the internal organization must be carefully designed and prepared in order to sustain internal support for ventures over time. Ventures that launch without this preparation are at great risk as soon as the initial enthusiasm for innovation begins to wane. One bad quarter for the company, or one transition for a key internal champion, or the arrival of a new CEO who wants to clean house, any of these unforeseen changes could spell doom for an unprepared internal venture program.
This suggests a further modification to Lean Startup: Get Upstairs in the Building. You will need strong, sustained internal support for successful internal venturing. You will need to get the bigwigs upstairs to sign up to the risks, and put structures in place to insulate and protect the ventures from the execution processes in a large company that will attack the new venture. Think of it as internal political product-market fit, and prepare to pivot in order to increase that fit (and your support).
We will continue our conversations, and I fully expect that Steve, Alex and I will have more to say about how best to structure and support new ventures inside a large corporation in future posts!
Internal ventures face a different context than do external startups.
Venturing inside a corporation is a 2-front war.
Lean Startup Methods are necessary, but insufficient, to fight this war.
An internal venture may need to pivot to gain or maintain internal support. Get Upstairs in the Building, to generate this support.
Stay tuned, as Steve, Alex and I have more coming….
With a ~$2 billion endowment the Kauffman Foundation is the largest non-profit focused on entrepreneurship in the world. Giving away $80 million to every year (~$25 million to entrepreneurial causes) makes Kauffman the dominant player in the entrepreneurship space.
Kauffman launched Founders School - a new education series to help entrepreneurs develop their businesses during the startup stage by highlighting how startups are different from big companies.
In January 2014 Part 1 of the “Startups” section of Founders School went online.
While the Lean LaunchPad class has been adopted by Universities and the National Science Foundation, the question we get is, “Can students in K-12 handle an experiential entrepreneurship class?” Hawken School has now given us an answer. Their seniors just completed the school’s first-ever 3-credit semester program in evidence-based entrepreneurship. Students are fully immersed in real-world learning during the 12-week Entrepreneurial Studies course.
Here’s what Doris Korda Associate Head of School and Tim Desmond, Assistant Director of Entrepreneurial Studies did, and how they did it.
Teaching students to think like entrepreneurs not accountants We realized that past K-12 Entrepreneurial classes taught students “the lemonade stand” version of how to start a company: 1) come up with an idea, 2) execute the idea, 3) do the accounting (revenue, costs, etc.).
We wanted to teach our students how to think like entrepreneurs not accountants. Therefore we needed them to think and learn about two parts of a startup; 1) ideation - how to create new ideas and 2) customer development – how do they test the validity of their idea (is it the right product, customer, channel, pricing, etc.)
Our first insight was that if broke the class in half, and separated ideation from customer development, our students would understand 1) that an idea is not the company, 2) almost all initial ideas are wrong.
So rather than starting with their own business ideas, we decided to first give our students experience doing customer discovery on someone else’s idea. Then in the second half of our semester let our students come up with their own ideas and then run the customer discovery process on their own product.
Customer Discovery in the Real World
Our students first worked with two local startups who agreed to be their clients, on real-problems. These two startups had problems they could not solve on their own due to lack of resources—time, people, money. The startups and the teaching team crafted a challenge for the kids to tackle using the Customer Development methodology, Lean Launchpad tools and the business model canvas.
For their first startup, we chose a 3-year old funded company that was working to refine its customer segment and channel for its physical product. For the second startup, we chose a year-old web/mobile startup whose market is college bound teens, with a founder who had skipped the initial customer validation process. These two startups served as the students’ introduction to customer development methodology. Each student team conducted over 100 detailed interviews in an effort to develop results for each client.
Hawken students practicing Customer Discovery in a mall
Because these were high school kids with, for the first time, a real business relying on them, this portion of the class shook them so badly they couldn’t move from their seats–literally. All their hard-wired school habits turned to dust as the kids realized their school tools were useless: there were no solution keys, no rubrics, no answers in the back of the book. Feeling the pressure, after 3 wasted days, one student on one team finally convinced her team they needed to get out of the building, like in Steve’s video. That’s when everything changed.
Knowing they had 3 weeks before presenting to the company co-founders, the kids felt intensity like no traditional classroom could generate. The pace and uncertainty of the class picked up and never let up from that point.
The second startup, because it was in an earlier stage and more complicated than the first, had the kids going even deeper into the 9 blocks of the business model canvas. Because the students’ customer development narratives revealed the client’s user interface was problematic, students with no programming experience began redesigning the user interface using Lean UX principles, tools and strategies.
Yet students were still afraid to rethink the client’s product: “if we tell [her] how to unclutter the interface, it will cost her a ton of money and she’ll be mad at us.” One of their mentors, a professional UX designer, encouraged the kids, “You have the facts. You’ve developed archetype and narratives from a ton of real customer interviews. You need to propose disruptive solutions. What can you propose that will solve the customers’ problems and set this product apart in a meaningful way?” This was a huge learning moment. Their final presentations were substantive and evidence-based.
Starting Your Own Company For the last three weeks of class, the 16 students came up with their own business ideas that they pitched to their peers; 4 of these ideas moved forward in the quest for viable business models. Interestingly the four founders of teams whose ideas “won” argued over which team would get the students with the most advanced technical skills. By the end of the half hour, students were suggesting that our school should offer more programming earlier in school and throughout this course.
We assigned one mentor to each of the four teams and used LaunchPad Central to hold all the details together, including hundreds of customer interviews, narratives, days in the life, archetypes, storyboards, user interfaces, live presentations and tons of often painful feedback.
Teams spent 3 weeks getting out of the classroom and iterated and pivoted, put to use the visual and lean tools along with all they learned from Steve Blank’s Udacity lectures, then pulled together enough data and crafted compelling stories for their final Shark-Tank style presentations. They presented to local sharks from four local accelerators—Bizdom, JumpStart, FlashStarts and LaunchHouse (which runs the country’s first kid launched/kid run accelerator for kids, called LightHouse).
Hawken students pitching the local “Sharks”
Having practiced negotiating terms, students calculated their companies’ valuations, ranging from 50k- 300k, and wrestled with the sharks over equity. Sharks, in turn, argued with one another and even attempted to form syndication in one instance. At the close of the presentations, two teams were invited to apply for funding through local accelerators. The semester concluded with pizza and ice cream.
Pioneers are the Ones With Arrows in Their Backs Trying to fit an Entrepreneurial Studies course into a college prep high school outside of Silicon Valley is an interesting challenge.
Being a pioneer means that there’s nothing familiar about this for parents, students and our administration. Hawken is exactly the right school to do this, but still our high school students and parents and other teachers are steeped in more traditional classes and subjects, college placement-related pressures, graduation requirements, AP courses, grades, etc.
Creating it feels a lot like building something totally new inside an existing business. But the course was spectacular for its students in ways that no other course is, so we’re getting money and institutional support for growing it. We’re learning a lot as we go…we’re figuring it out.
Summary The Entrepreneurial Studies course serves as a vehicle for the school to realize its mission — forward-focused preparation for the real world through development of character and intellect. The 16 seniors who just completed the first Entrepreneurial Studies course told us that it was different from anything they have ever done in school – all the learning was active and all the work was collaborative and team-oriented. In evaluations they explained the biggest lessons they learned were often about themselves and how they handled failure, their character and their own strengths and weaknesses.
From one senior: “For the first time I am working because I care. Not just for a grade.”
Students work harder, better and deeper when the stakes are real
Working for local startups gives them a great way to quickly gain business and life experience alongside customer development experience
Working for local startups creates real world intensity and urgency in the course
Kids freak out, get paralyzed and waste time doing so. It’s all part of the learning process
The learning and growth of how to work well on a team is reason enough for students to enroll in Lean Launch Pad
We never anticipated the amount of learning that happened here
Even at a very progressive school, we are breaking new ground and challenging all the traditions and biases of regular school
This June, Hawken School is holding an Educator’s Workshop for middle and high school educators who want to build or grow their own LLP-based programs.
In the last few years we’ve recognized that a startup is not a smaller version of a large company. We’re now learning that companies are not larger versions of startups.
There’s been lots written about how companies need to be more innovative, but very little on what stops them from doing so.
Companies looking to be innovative face a conundrum: Every policy and procedure that makes them efficient execution machines stifles innovation.
This first post will describe some of the structural problems companies have; follow-on posts will offer some solutions.
Facing continuous disruption from globalization, China, the Internet, the diminished power of brands, changing workforce, etc., existing enterprises are establishing corporate innovation groups. These groups are adapting or adopting the practices of startups and accelerators – disruption and innovation rather than direct competition, customer development versus more product features, agility and speed versus lowest cost.
But paradoxically, in spite of all their seemingly endless resources, innovation inside of an existing company is much harder than inside a startup. For most companies it feels like innovation can only happen by exception and heroic efforts, not by design. The question is – why?
The Enterprise: Business Model Execution We know that a startup is a temporary organization designed to search for a repeatable and scalable business model. The corollary for an enterprise is:
A company is a permanent organization designed to execute a repeatable and scalable business model.
Once you understand that existing companies are designed to execute then you can see why they have a hard time with continuous and disruptive innovation.
Every large company, whether it can articulate it or not, is executing a proven business model(s). A business model guides an organization to create and deliver products/service and make money from it. It describes the product/service, who is it for, what channel sells/deliver it, how demand is created, how does the company make money, etc.
Somewhere in the dim past of the company, it too was a startup searching for a business model. But now, as the business model is repeatable and scalable, most employees take the business model as a given, and instead focus on the execution of the model – what is it they are supposed to do every day when they come to work. They measure their success on metrics that reflect success in execution, and they reward execution.
It’s worth looking at the tools companies have to support successful execution and explain why these same execution policies and processes have become impediments and are antithetical to continuous innovation.
20th century Management Tools for Execution In the 20th century business schools and consulting firms developed an amazing management stack to assist companies to execute. These tools brought clarity to corporate strategy, product line extension strategies, and made product management a repeatable process.
For example, the Boston Consulting Group 2 x 2 growth-share matrix was an easy to understand strategy tool – a market selection matrix for companies looking for growth opportunities.
Strategy Maps are a visualization tool to translate strategy into specific actions and objectives, and to measure the progress of how the strategy gets implemented.
Product management tools like Stage-Gate® emerged to systematically manage Waterfall product development. The product management process assumes that product/market fit is known, and the products can get spec’d and then implemented in a linear fashion.
Strategy becomes visible in a company when you draw the structure to execute the strategy. The most visible symbol of execution is the organization chart. It represents where employees fit in an execution hierarchy; showing command and control hierarchies – who’s responsible, what they are responsible for, and who they manage below them, and report to above them.
All these tools – strategy, product management and organizational structures, have an underlying assumption – that the business model – which features customers want, who the customer is, what channel sells/delivers the product or service, how demand is created, how does the company make money, etc – is known, and that all the company needed is a systematic process for execution.
Driven by Key Performance Indicators (KPI’s) and Processes Once the business model is known, the company organizes around that goal and measures efforts to reach the goal, and seeks the most efficient ways to reach the goal. This systematic process of execution needs to be repeatable and scalable throughout a large organization by employees with a range of skills and competencies. Staff functions in finance, human resources, legal departments and business units developed Key Performance Indicators, processes, procedures and goals to measure, control and execute.
Paradoxically, these very KPIs and processes, which make companies efficient, are the root cause of corporations’ inability to be agile, responsive innovators.
This is a big idea.
Finance The goals for public companies are driven primarily by financial Key Performance Indicators (KPI’s). They include: return on net assets (RONA), return on capital deployed, internal rate of return (IRR), net/gross margins, earnings per share, marginal cost/revenue, debt/equity, EBIDA, price earning ratio, operating income, net revenue per employee, working capital, debt to equity ratio, acid test, accounts receivable/payable turnover, asset utilization, loan loss reserves, minimum acceptable rate of return, etc.
(A consequence of using these corporate finance metrics like RONA and IRR is that it‘s a lot easier to get these numbers to look great by 1) outsourcing everything, 2) getting assets off the balance sheet and 3) only investing in things that pay off fast. These metrics stack the deck against a company that wants to invest in long-term innovation.)
These financial performance indicators then drive the operating functions (sales, manufacturing, etc) or business units that have their own execution KPI’s (market share, quote to close ratio, sales per rep, customer acquisition/activation costs, average selling price, committed monthly recurring revenue, customer lifetime value, churn/retention, sales per square foot, inventory turns, etc.)
Corporate KPI’s, Policy and Procedures: Innovation Killers
HR Process Historically Human Resources was responsible for recruiting, retaining and removing employees to execute known business functions with known job spec’s. One of the least obvious but most important HR Process, and ultimately the most contentious, issue in corporate innovation is the difference in incentives. The incentive system for a company focused on execution is driven by the goal of meeting and exceeding “the (quarterly/yearly) plan.” Sales teams are commission-based, executive compensation is based on EPS, revenue and margin, business units on revenue and margin contribution, etc.
What Does this Mean? Every time another execution process is added, corporate innovation dies a little more.
The conundrum is that every policy and procedure that makes a company and efficient execution machine stifles innovation.
While companies intellectually understand innovation, they don’t really know how to build innovation into their culture, or how to measure its progress.
What to Do? It may be that the current attempts to build corporate innovation are starting at the wrong end of the problem. While it’s fashionable to build corporate incubators there’s little evidence that they deliver more than “Innovation Theater.” Because internal culture applies execution measures/performance indicators to the output of these incubators and allocates resources to them same way as to executing parts of company.
Corporations that want to build continuous innovation realize that innovation happens not by exception but as integral to all parts of the corporation.
To do so they will realize that a company needs innovation KPI’s, policies, processes and incentives. (Our Investment Readiness Level is just one of those metrics.) These enable innovation to occur as an integral and parallel process to execution. By design not by exception.
We’ll have more to say about this in future posts.
Innovation inside of an existing company is much harder than a startup
KPI’s and processes are the root cause of corporations’ inability to be agile and responsive innovators
Every time another execution process is added, corporate innovation dies a little more
Intellectually companies understand innovation, they don’t have the tools to put it into practice
Companies need different policies, procedures and incentives designed for innovation
Currently the data we use for execution models the past
Innovation metrics need to be predictive for the future
Since 2005 startup accelerators have provided cohorts of startups with mentoring, pitch practice and product focus. However, accelerator Demo Days are a combination of graduation ceremony and pitch contest, with the uncomfortable feel of a swimsuit competition. Other than “I’ll know it when I see it”, there’s no formal way for an investor attending Demo Day to assess project maturity or quantify risks. Other than measuring engineering progress, there’s no standard language to communicate progress.
Corporations running internal incubators face many of the same selection issues as startup investors, plus they must grapple with the issues of integrating new ideas into existing P&L-driven functions or business units.
What’s been missing for everyone is:
a common language for investors to communicate objectives to startups
a language corporate innovation groups can use to communicate to business units and finance
data that investors, accelerators and incubators can use to inform selection
While it doesn’t eliminate great investor judgment, pattern recognition skills and mentoring, we’ve developed an Investment Readiness Level tool that fills in these missing pieces.
Investment Readiness Level (IRL) for Corporations and Investors The startups in our Lean LaunchPad classes and the NSF I-Corps incubator use LaunchPad Central to collect a continuous stream of data across all the teams. Over 10 weeks each team gets out of the building talking to 100 customers to test their hypotheses across all 9 boxes in the business model canvas.
We track each team’s progress as they test their business model hypotheses. We collect the complete narrative of what they discovered talking to customers as well as aggregate interviews, hypotheses to test, invalidated hypotheses and mentor and instructor engagements. This data gives innovation managers and investors a feel for the evidence and trajectory of the cohort as a whole and a top-level view of each teams progress. The software rolls all the data into an Investment Readiness Level score.
(Take a quick read of the post on the Investment Readiness Level – it’s short. Or watch the video here.)
The Power of the Investment Readiness Level: Different Metrics for Different Industry Segments Recently we ran a Lean LaunchPad for Life Sciences class with 26 teams of clinicians and researchers at UCSF. The teams developed businesses in 4 different areas– therapeutics, diagnostics, medical devices and digital health. To understand the power of this tool, look at how the VC overseeing each market segment modified the Investment Readiness Level so that it reflected metrics relevant to their particular industry.
Medical Devices Allan May of Life Science Angels modified the standard Investment Readiness Level to include metrics that were specific for medical device startups. These included; identification of a compelling clinical need, large enough market, intellectual property, regulatory issues, and reimbursement, and whether there was a plausible exit.
In the pictures below, note that all the thermometers are visual proxies for the more detailed evaluation criteria that lie behind them.
Therapeutics Karl Handelsman of CMEA Capital modified the standard Investment Readiness Level (IRL) for teams developing therapeutics to include identifying clinical problems, and agreeing on a timeline to pre-clinical and clinical data, cost and value of data points, what quality data to deliver to a company, and building a Key Opinion Leader (KOL) network. The heart of the therapeutics IRL also required “Proof of relevance” – was there a path to revenues fully articulated, an operational plan defined. Finally, did the team understand the key therapeutic liabilities, have data proving on-target activity and evidence of a therapeutic effect.
Digital Health For teams developing Digital Health solutions, Abhas Gupta of MDV noted that the Investment Readiness Level was closest to the standard web/mobile/cloud model with the addition of reimbursement and technical validation.
Diagnostics Todd Morrill wanted teams developing Diagnostics to have a reimbursement strategy fully documented, the necessary IP in place, regulation and technical validation (clinical trial) regime understood and described and the cost structure and financing needs well documented.
For their final presentations, each team explained how they tested and validated their business model (value proposition, customer segment, channel, customer relationships, revenue, costs, activities, resources and partners.) But they also scored themselves using the Investment Readiness Level criteria for their market. After the teams reported the results of their self-evaluation, the VC’s then told them how they actually scored. We were fascinated to see that the team scores and the VC scores were almost the same.
The Investment Readiness Level provides a “how are we doing” set of metrics
It also creates a common language and metrics that investors, corporate innovation groups and entrepreneurs can share
It’s flexible enough to be modified for industry-specific business models
It’s part of a much larger suite of tools for those who manage corporate innovation, accelerators and incubators